April 27, 2009 -- If the car companies crash, will your pension crash with them?
That question is being raised on assembly lines around America, in the towns where many auto workers went to retire, and in the halls of Washington. The issue goes far beyond the car companies.
The answer, from economists and others who keep an eye on retirement plans, is that most workers' pensions will be safe -- but... And it's a pretty big "but."
First, warn some economists, there may be a domino effect if Chrysler or General Motors declare bankruptcy. As they reorganize into smaller, leaner companies, they are likely to cut back on the benefits they offer to future employees -- and companies in other industries, under pressure themselves, may do the same.
Second, the struggling economy has been hard on many pension plans. Hammered by the downturn, some of them simply do not have the money at the moment to pay all their projected obligations.
"You have this triple storm," said David Certner, legislative policy director for AARP, the advocacy group that represents people over age 50. "The market is down, interest rates on fixed-income investments are low, and there are tough rules to limit what a pension plan can do to raise more money."
'The People at the Bottom'
That leaves many workers -- retired or not -- angry.
"A lot of people were greedy," said Larry Croisdale, a retired maintenance supervisor for Delphi, the giant auto parts supplier near Buffalo, N.Y. "They took too much money -- the people at the top -- and they forgot the people at the bottom."
Still, said Croisdale, "I feel better than all those GM employees."
There is no saying yet whether GM or Chrysler actually will declare Chapter 11 bankruptcy. Chrysler's deal with the Canadian Auto Workers union, reached Sunday, leaves pensions untouched. But in the long run, economists say it is inconceivable that the auto companies would be as generous about pensions as they used to be.
Many American auto workers used to assume they could work for 20 years and retire with full benefits. It often has been estimated that the cost of an American-made car is driven up more than $1,500 by the retirement benefits the auto companies pay.
Pension Pain: What if Automakers Fail?
Most American employers have stopped offering pensions; 401(k) plans are much less expensive -- and it's the worker who takes the hit if he or she makes unlucky investment decisions.
The Pension Benefit Guaranty Corp., a government agency created (after lobbying by the United Auto Workers) in 1974, currently insures 29,000 pension plans -- down from 114,000 plans in 1985.
"It's been a precipitous drop," said Jeffrey Speicher of the PBGC.
Various economists estimate that 18 million American workers are still covered by pension plans.
The PBGC protects pensioners if a company actually goes out of business. It would take over the company's pension plan and continue to pay retirees.
But there are limits to the insurance, now $54,000 a year for workers who retire at age 65.
Younger retirees get less, on a steeply sliding scale. An auto worker who retired at age 50, expecting to get a pension equal to his or her old salary, would find that the maximum the PBGC can pay is only $18,900 a year.
"That's not to say that Chrysler plans to come to us if it declares Chapter 11," said Speicher. "It's quite possible that Chrysler emerges from Chapter 11 with a pension plan still going."
Pension plans pool together the retirement savings of an entire company's workforce, young and old. The employer sets aside an amount of cash each pay period, based on a percentage of each worker's salary.
The percentage is set by how long the average worker is expected to live, what kind of return the company hopes to get on its investments and on how large of a payout the company plans to make at retirement.
It all gets invested and is eventually used to make payments to workers once they retire.
Many companies are deciding to freeze those pensions now in order to save money in the long-run. Employees get credit for their time already served but won't get any additional credits. That can really hurt employees who are close to retirement but not quite there, because pension plans tend to give more generous benefits for the later years of service.
For instance, one employee might have planned on staying with a company for 30 years, only for it to freeze the pension during their 25th year. The employee would still get credit for those 25 years of work, but it's really those last five years that push up the value of the pension.
Employers Cut Off Pension Plan Accumulation
Olivia S. Mitchell, executive director of the Wharton School's Pension Research Council at the University of Pennsylvania, has been watching companies scaling back.
She said roughly $2 trillion has been lost in 401(k)s and pension plans during the recession.
"Plan sponsors are going to have to start contributing more to back the promises they've already made," Mitchell said. "Corporate plan sponsors are looking very hard at whether they can reduce future benefit accruals."
Companies can't touch the benefits workers already received, but nothing stops them from ending their pension plans in the immediate future.
Peter Austin, executive director of Bank of New York Mellon Pension Services, said that many companies are forced to make higher contributions to their pension plans because the value of their portfolios plunged.
But he said that while bankruptcy is never a good thing, "the sky's not falling." He said the plans are set up in a way that even if a company collapses, workers are safe from losses.
"Even in the worst case of bankruptcy," he said, "their benefits will be protected."